3 Money Myths Debunked

Every day we make decisions using our money beliefs as a guiding light. Unfortunately, some of those beliefs may be incorrect. So today, I'd like to debunk three myths I most often come across as a financial advisor.

1. I Need $1 Million to Retire

Everyone needs to take the time to figure out when they would like to retire and what they plan to do in retirement. Too many people erroneously assume $1 million is the magical number they need to achieve. It's entirely possible you are correct. Or it may be significantly less or significantly more. Why? Because it depends on what YOU want.

One thing I've noticed is people rely too heavily on what others tell them they need for retirement. Their neighbor, co-worker or the guy yelling the loudest on TV is who they follow without taking into consideration their own needs. Remember, this person isn't you, and their vision of the perfect retirement may differ completely from yours.

Since I assume you want to live your dreams and not mine or theirs, please don't assume what number is right for me is right for you. Instead figure out what you need and go from there.

2. Credit Cards Are Evil

Credit cards are a tool that we too often abuse. Somehow we adapted a mindset that credit cards are a natural extension of our salary.

They are not.

We don't commonly think of credit cards as a loan, but that is essentially what they are. Because most people don't think of it as borrowing, they don't hesitate to buy things on credit that they typically wouldn't consider taking out a loan for—such as clothes, gas or even groceries.

People get themselves into consumer debt and then blame credit cards. With all due respect, it wasn't the credit card that got you into trouble.

You did.

Yes, credit card companies make it very easy and convenient for you to consume and live beyond your means. Remember, they are a business and their goal is to make money, but they didn't force you to buy anything either. Credit cards are not evil; we just need to learn how to use them to our advantage, which doesn't include funding a lifestyle beyond our means.

Enjoy the convenience credit cards offer and their reward programs as long as you use them responsibly and pay your bill in full every month. If you can't, then you need to take a closer look at your spending habits and figure out how to break the cycle of overspending.

3. Some Debt is Good; Some Debt is Bad

I don't believe in good debt or bad debt. I think it's an oversimplification and a bit misleading. Good debt can turn bad if you overextend yourself for example. The better way to approach debt is to remember that all debt has risk. And the question you need to ask yourself is whether leveraging debt is worth the risk and return.

Viewing debt from a good/bad or right/wrong lens doesn't give you the full picture and can make people fear debt. I don't want you to fear debt as it puts money in the position of power, rather than you. I want you to respect debt, so you know when to avoid it and when to carefully enter into it.

Mortgages often fall into the category of "good" debt. Very few people can outright purchase a home in cash, which often necessitates taking out a loan. But categorizing mortgages as good debt inherently implies that it's a smart financial move. And it absolutely can be, except when it's not.

For most of us, a mortgage will be our largest loan and should not be entered into lightly. A common mistake is people buy more home than they can truly afford and live the life they want. While they may be able to afford their monthly mortgage payments, they have little money for anything besides bills. Hobbies and fun are set aside, unless they choose to fund those activities on their credit cards, which leads to more debt.

Good debt gone bad.

All debt has risk because there is always the potential you could default. Is home ownership worth the risk? For many people the answer is yes. Fantastic!

Now it's time to consider all the other things in life you enjoy, so you buy the home you can afford AND still have money to do other things that matter to you.

Other considerations include: How long will you live there? What's your contingency plan if someone loses their job, becomes disabled or dies prematurely? These are just a sampling of questions you need to answer, so you can make an informed decision on how much debt you can comfortably leverage.

Your Turn

What money myths have you believed in the past?

Shannon Ryan

Shannon Ryan, CFP® is a Mom on a mission to help busy parents teach their children simple, value-based principles that guide their money decisions and support their long-term financial well-being. Shannon wrote The Heavy Purse to help parents start money conversations with their children through a fun, bedtime story and developed companion workbooks to help deepen those conversations. Visit TheHeavyPurse to learn more on how to raise Money Smart Kids.

Comments

Great post, Shannon! It's so important to not fall into the "one size fits all" trap when it comes to retirement planning. Some people would be 100% happy living in a small condo and enjoying the free parks, amenities, etc. and feel no need to travel or have expensive cars, etc. They can live on quite a bit less than someone who wants to own a second home in Hawaii when they retire! It's all about goals.

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I agree, DC. My father retired at age 54. My mom still works part-time but it's because she wants to work, rather than needs to work. They have no debt, own their home and are very happy. They don't have big plans to travel the world and live simply. There retirement life isn't for everyone but suits them perfectly. Everyone has a different vision and that the vision they need to save for.

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Great article, Shannon. I agree with everything you pointed out here. I don't like how most people just hear a general guideline (i.e. $1M needed for retirement or credit cards are bad) and take that as what's right. Personal finances are just that, personal. What works for one person may not work for another. There is no one size fits all here.

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Yup, sometimes people just want to hear a general guideline rather than take the time to figure out what they need. It doesn't work that way when it comes to retirement. I would hate to underfund my retirement (yikes! I don't want to be a Walmart greeter!) or find out I could have retired earlier had I done some better planning. It is personal and frankly I think it's fun to think about what you want to achieve and do in life!

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This is a great post Shannon. We live in a "keeping up with the Jones'" world and that's what gets people in trouble.

The one myth I've heard was about credit cards, the more you use it the better it is for your credit...wrong!

While I was reading your second bullet about credit cards I was thinking about a comment I heard about someone's credit card being on fire from how much they swiped it....to them it was funny but I was thinking, yeah I'm sure you're not smiling when the bill comes but you look great in your designer clothes LOL.

Thinking and planning go hand in hand when buying a home. When we bought our first house we had no clue what we were doing and we're paying for it with a high mortgage rate.

I hope folks read this post and let's it sink in. Financial mistakes can take lots of years to make-up, I know firsthand. :)

Hope you're having a great day ladies! Hugs!

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We definitely live in a Keeping up with Joneses kind of world. I had a sibling that ran into some credit card problems and that fear of repeating their mistakes has always kept me quite cautious with my own cards. It seems like money or credit cards have the upper hand in the most relationships, including my own. It's one of the things I appreciate about working with Shannon is how much she talks about taking back control of your money. Many people make money mistakes because they don't really have a handle on their money. Those mistakes unfortunately do take time to fix but thankfully they can be corrected! :)

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These are good points, Shannon! I know I have that million dollar idea for retirement stuck in my head and I have no idea where it came from. My husband and I need to sit down and figure out what we realistically want our lives to look like at that stage. It's kind of a daunting task.

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You're not alone! I've had that number stuck in my head too. I think it's the number that gets the most press. It is a big task, but I always find it fun to think about what I really want to do. The harder part for me is taking action or making sure I'm actually saving enough to fund those dreams! :)

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Excellent, Shannon! Any time we try and put a blanket "This is what you need/will work" statement over a personal finance or any other rule, I think caution needs to be taken. Myth number 1 reminds me of a PF blogger I read about who retired on WAY less than 1M. He just lives a super frugal life. Not for me, but we all have different expectations, etc. that can change what we need to retire.

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I agree, Laurie. I see so many people giving their opinions (as they should) but sometimes it seems like they think there answer or view is the only correct one. Personal finance IS personal. My dad retired young but my parents are also frugal and didn't have any exotic plans for retirement. It's not exactly how I view my own retirement but that's what works for them and they are happy.

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